Adverse selection,moral hazard and propitious selection |
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Authors: | Philippe De Donder Jean Hindriks |
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Institution: | (1) Toulouse School of Economics (GREMAQ-CNRS & IDEI), 21 allée de Brienne, 31 000 Toulouse, France;(2) Department of Economics and CORE, Université Catholique de Louvain, Louvain-la-Neuve, Belgium |
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Abstract: | We propose a simple model with preference-based adverse selection and moral hazard that formalizes the cherry picking/propitious
selection argument. This argument assumes that individuals differ in risk aversion, potentially resulting in more risk averse
agents buying more insurance while being less risky. The propitious selection argument is summarized by two properties: regularity
(more risk averse agents exert more caution) and single-crossing (more risk averse agents have a higher willingness to pay
for insurance). We show that these assumptions are incompatible with a pooling equilibrium, and that they do not imply a negative
correlation between risk and insurance coverage at equilibrium.
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Keywords: | Cherry picking Propitious selection Advantageous selection Precaution choice Social insurance |
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